First Analysis - Am I anywhere in the ballpark of reality?

13 Replies

I am going to preface this with I am a completely new investor (0 deals under my belt, but will buy at least one property in 2018). I would like to do some variation of a house hack in San Diego (ADU/SFH-MFH conversion/small MFH rehab).

Browsing Real Estate Websites,-116.814881,32.687353,-117.553025_rect/10_zm/1_rs/1_fr/

I was looking at Zillow last Friday and found this listing (it is now pending sale), and thought "maybe this single story 5/3 could be split into 2-3 units?" I saw the property was zoned RM-2-5 and the lot is large enough to accommodate 3 units, so I got excited. I wanted to walk through it thinking I would pay a contractor for his time to explain what he sees and recommends, but haven't yet met a good contractor with this type of expertise. It's a foreclosure and the listing price seems to be ~the remaining debt balance, but I imagine the bank would be willing to take less since it has been posted for so long. Is this a correct assumption? 

If you came across this listing and it wasn't yet pending sale, what would go through your mind? Would you pass on it immediately; if so why? If you would view the property, what caught your eye?

*Please recognize this is all hypothetical, as one walk through of the property could wreck the entire opportunity. I'm going through this exercise to understand what I must tweak in my mental analysis to qualify or disqualify properties as I see them on the MLS.*

Rehab Costs (pulling numbers out of thin air)

I have no idea what rehab costs would be for this property and would need an experienced investor/contractor to help me understand. That said, these numbers came to mind and I wanted to understand if these were even in the right ballpark. I thought maybe offer $325k-$350k (think they'd take $300k?) rehab at $100-$125k, all in for $450k + closing costs. I'm looking to house hack so assuming everything panned out, I would move into one of the "units" that we created and once the rehab is complete, rent out the other units (In total have a 2/1 + 2/1 +1/1).


Cash savings set aside for Real Estate ($8,800) + What I could loan myself from my retirement account ($12,428) = Total personal investment of $21,228.

My first thought was that I would have to use an FHA loan due to low down payment, and probably a standard 203(k) to help cover the rehab costs. Using FHA, especially 203k, would probably not be something a bank would want to consider on a foreclosed property, am I right?

A Conventional Rehab Mortgage would require 5% down, which means I'd need more money. I could stretch and put in enough money to meet the 5% down requirement. Not sure if this would make me more attractive to the seller (bank) at all.


I've been playing around with the BP Rental calculator, assuming $450k purchase price and $0 rehab (since I need the rehab wrapped into the mortgage), and this doesn't cash flow under my assumptions. That said, our housing expenses would drop from $1850 in rent to paying less than $1200/month as long as I lived in it. I put some rent slightly lower than market rates (assuming 2/1, 2/1, 1/1), because I figured there would be less open space (living/dining area) inside each unit. I put capex and repairs a lower percentage since I would have just rehabbed it. I have no idea if my cost inputs are accurate - would love some feedback on how to come to more reliable and accurate numbers when analyzing a deal like this. @Brandon Turner , those webinars help me understand how to use the calculators, but I still gotta learn to input accurate numbers! :)

BP Rental Calculator

Ok, that was long. Please tear apart my process: let me know what is stupid, but also tell me why. How can I improve? What didn't I think of that I should have considered? The more feedback the better; I'm just looking to learn fast so I can make my first purchase and get the ball rolling. Thanks!

@Kevin Fox , I know you work with investors here in San Diego. @Justin R. , I know you have done single-family to multi-family conversions in this market. Thoughts?

@Tim Coulter

1) I am not in this market so not sure how realistic $550K ARV is and not sure if the seller would take a $70K haircut on price, on a MLS deal. This alone determines the deal.

2) You need a much bigger reserve. Especially if you are rehabbing and expecting to carry a $2000+ mortgage each month. It will take you at least 6 months or so to finish rehab and find renters. 

3) Your closing cost is too low. Closing cost is about 3%-4% of purchase price in my market. $12Kish for this deal + inspection cost+lawyer fees.

4) Rehab cost can vary depending on finishes. I would suggest pricing a hypothetical rehab at the item level to help you become familiar with prices. Literally itemize a budget and imagine picking out every piece of a rehab (kitchen, bath, hvac, plumbing, roofing, etc.). gives you a good understanding of what things may cost. Then find a contractor to help you estimate labor.

5) if you plan to live in the property and rent half out you don't need management fees.

good luck

@Ibn Abney Thank you! I really appreciate it. 

2) Reserve is a big one that I didn't think about. Looks like I'd definitely need to save more $$$ before attempting something like this, or have a less complicated project and do a "live-in rehab".

3) Yes, my closing costs are definitely too low; thanks for pointing that out.

4) Regarding rehab, I need to start walking through properties with someone who can share their experience. I have no idea how much things would costs right now (labor or materials). I do like the idea of itemizing it to help me gain a better understanding.

5) I included 10% management fees to determine whether this would still be a good investment when I moved out down the road.

Thanks again for your comments!

Hello Tim, 

I live in/own a property in San Diego zoned RM-2-4 which means that depending on the lot size, you can do a max of 2 units.  All restricted by the floor-area-ratio from the City.  So to get around those restrictions, you might need to build up with a second story - which, of course, increases your costs by a big factor. 

So for me, the VERY first thing that would go through my mind is how many units I can legally stuff into the space I'm given. Do I need to add a 2nd floor? Can I simply add an ADU (accessory dwelling unit or granny flat)? So I would first qualify the property size with my required # of rental units to make a profit.

The property you showed us is on a 7,500 sq/ft. lot.  Which, on the surface seems to allow you the flexibility to add the 2-3 units you want.  The price of the property is great (under $400K) so I would have jumped on it after first having confirmed the above.  The existing condition of the property isn't as much of a consideration...the value of that land with an income-generating unit exceeds the current costs.  You would end up with a +$million property.  Spend $400k to acquire and another $400K max to rehab.  $800K max outlay. 

After rebuild/remodel, you're already at $200 positive equity on paper before you collect the first month's rent.

This would have been a good project assuming you had access to required capital or funding.   

@Anthony Ciulla , thanks for the post! This property shows a 7500 sq/ft lot but in the description of the post it says the lot is only 5,748 sq/ft. Either way, it's still a large lot space for San Diego!

I've been interested in using ADUs here in San Diego; not sure why I didn't think about adding to the lot. I believe I have access to private money (through family), but I need more experience and/or be partnered with someone with a good track record before I even approach them about something like this. Thanks for helping me think differently about this property! 

Did you build an ADU (or multiple ADUs) on the RM-2-4 property you live on?

Not yet...but that's my plan.  I'm in the design-phase.  My lot is 2,500 sq/ft which allows me only 1,750 sq/ft living space (ground floor).  I need to dedicate 25% for off-street parking - reducing my livable living area.  And don't forget the set backs & FAR (0.7 in my case).  This reduces my living area down to 1,312 sq/ft. So the only way to put a 2nd unit is to go up with a second story.  But I also have a 30 foot max height because I'm in the coastal zone.  See...lots of considerations BEFORE I even think about remodeling/rehab costs.  I think many people put the cart before the horse.  They'll purchase a property without doing their due-diligence on the zoning and other restrictions.  Then get stuck with a property they can't legally convert into multifamily.  

An ADU allows me to "bend" some of these restrictions. That's what I'm designing. I will occupy one of the units. Overall, the rental income will reduce (not eliminate) my monthly outlays allowing me to live in San Diego at an affordable price while also creating equity in my home. It's that equity that I'll leverage for future investments. The rent I collect after I pay off the mortgage is my retirement annuity.

One thing I know, if you can break into the San Diego market, you've increased your scale and potential for ROI. VERY high demand and VERY low supply.

Good luck!

book on estimating rehab costs on BP. and start building your network (CPA, Lawyer, Investors, Partners, Agents, GC/Inspectors/Handmen, PM) Then you will start knowing how to value the property and costs of repair etc. Know your rental market, know if your market cash flows or not, and how to add value to property to force it to cash flow and increase, get deals that have immediate ROI and equity. Stick to your numbers. But that means really doing your due diligence in you farm market. Know your closing costs, know your tax's from county tax assessor. Then you should be good to go for more dialed in and accurate evaluation.

Thanks @Brian Bradley ! I will check out the book on estimating rental costs and am starting to build my network now. Looking forward to the day when I can accurately assess value and costs.

@Tim Coulter don't be intimidated or get stuck in analysis paralysis. Learn how to analyze th a property, and then find creative ways to get the downpayment you need if you don't have it all yourself. Use partnerships, you leverage your time and find somebody with the 20% down who wants to just finance, then refinance and add their investment on top of your loan and pay them back and own the property out right. Or get a HELOC on your house, use that money for the down, then refinance after one year and pay back the line of credit. Just start analyzing properties, at least one a day, after 25-50 it will be so easy for you. Then you really will know your farm market and what you need to find to get a deal done. Just do not get stuck in feeling that you can't move forward until you learn the next new thing, or that you can't move forward since you don't have all or any of the money. Be creative and ask you self "HOW" will I do this or "HOW' will I get this done if you really want it. The power of your "WHY" and "HOW" is amazing.

Insurance seems low.

Your management number doesn't seem to include leasing fees.

I don't see anything about property taxes in here, which is going to be one of your largest expenses.

Closing costs seem low.

Most importantly you've got 20K available and you're looking at going almost half a million dollars into debt to purchase a negative cash flowing asset (I assume $3800 includes hypothetical rent from all units) at what is likely the top or near the top of the market.

That's a huge amount of risk to take on to save $650 a month in living costs in an absolute best case scenario.

Originally posted by @Anthony Ciulla :

Not yet...but that's my plan.  I'm in the design-phase.  My lot is 2,500 sq/ft which allows me only 1,750 sq/ft living space (ground floor).  I need to dedicate 25% for off-street parking - reducing my livable living area.  And don't forget the set backs & FAR (0.7 in my case).  This reduces my living area down to 1,312 sq/ft. So the only way to put a 2nd unit is to go up with a second story.  But I also have a 30 foot max height because I'm in the coastal zone.  

Unclear from your description if you're already aware of it (maybe you are), but the FAR is a measurement of the entire building envelope.  So, adding square footage on the second story will count towards your FAR as well.

Also, I think you said you're in RM-2-5.  Your FAR there is 1.35, meaning you can go as high as 3375 sqft in your building envelope.  This includes garage space, phantom floors, and other stuff, depending on the design.

Really difficult to meet the parking requirements when adding on to existing structure on these small lots after taking setbacks into consideration.

@Tim Coulter The accuracy of the closing costs and insurance and maintenance are irrelevant because this strategy is dominated by two things that are ~2 orders of magnitude more important than any of that:

1. The ability to get the property under contract and close on it. Your headwinds here include access to capital, lack of excess liquidity, 50 other investors who will fight you for the property, and difficulty of the FHA / 203k loan. Watch what this sells for - I'd bet it'll be north of $425k and all cash.

2. The cost and execution of the build. The raised foundation makes some things easier, but you've still got plans and architecture and permits and everything else. Assuming you carve out an ADU, I'd estimate $75k in construction costs and another $10k in professional and City fees. You gotta carry it while you're doing all that, and you gotta know the people who can help with permitting part. Oh, and executing the construction.

Those are all the reasons why *not* to do it.  Just hurdles to find a way over.  :-)

I took a look at this property when it came on - your instincts are correct that there's opportunity here. By my calcs, the best play here would be separating the existing structure into an additional unit under the ADU ordinance. Assuming it sells for $425k, $100k rehab, and $15k in professional and City fees, you'd have a well-done $540k duplex. Location is pretty bleh - only way to get to it is through an alley, and it sits right above a busy freeway. Rent would probably be in the $2k/m ballpark, which is close to being an investment with a decent current return.

Unfortunately, feasibility of adding parking makes full development of it impractical unless you could get the adjacent lot as well.

You and I are due a meeting - we can talk details and I'll show you some similar projects and their proformas and actuals to give you more data.  Good on you for posting this sample opportunity!

Thanks @Justin R. , this feedback is very helpful. Looking forward to meeting!

@Tim Coulter I'm in SD and just started analyzing properties using BP insight for practice and past investments. I purchased a SFH in 2014 and just acquired a duplex in January, but am looking to expand in 2018.

I am by no means am an expert, but I am looking for someone to compare numbers with on the same hypotheticals. Let me know if that's something you'd be interested in. Cheers! 

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